Before You Buy a Business which is for Sale - 4 Questions To Ask Yourself
1. Is It Making Money?
When you decide to buy a business, you have to consider several businesses and analyze them to see how well they are performing. The most reliable indicators of a company's performance are its financial statements. There are cases where despite unimpressive earnings, a company may be poised for tremendous growth. But as far as basic profit and loss go, the financial statements will tell you everything you need to know. It is only after examining them that you should think about taking a strategic decision to buy a business.
As a potential buyer, the things you need to look at are:
• Income Statements
• Cash Flow Statements
These financial statements need to be up to date and audited, going back at least three years.
Income Statements:
The income statement tells you the earnings before interest, taxes and depreciation. Looking at the income statements will let you know immediately whether or not the company is making money. After that, if you decide to go ahead, you should take a look at the cash flow statements, which will give you a more detailed breakup of where the company has been making money and what its major expenditures have been.
Cash Flow Statements :
The cash flow statements will not only tell you how the company has spent its money, but will also give you a good idea of the operations of the company. The statement will mention all the cash outflows (salaries, rent, maintenance, purchases etc.) and the inflows (sales, investment income, insurance payments, loans etc.), which will tell you how the previous owner has been running the company. This should be an important consideration when you're thinking of buying a particular business.
The most important thing to look at after the company's financial statements is its asset base. This could include everything from heavy machinery to customer lists. Almost anything that will be of value to a competitor can be considered an asset. The kind of real estate held by the company will also add considerably to its valuation.
2. How Impressive Are Its Financial Ratios?
Compare the business to other businesses in the industry to get an idea of how competitive the seller's offer is. Examining financial ratios is a way of analyzing the performance of the company that tells you more than just whether it's making money or not. The important financial ratios to consider are the liquidity ratio, efficiency ratio, profitability ratio and solvency ratio. If you're not sure how to calculate the financial ratios, take the help of your financial expert to do so. Your business broker will usually be willing to help you decide whether a company is right for you, including calculating its financial ratios.
3. Is Everything On Paper?
A company that has been meticulous in its documentation is one that has made a habit of efficiency. In many companies, things like job descriptions, process charts and the organizational structure are often not put down on paper, they just arise out of daily practice. But a company that makes a point of recording everything will be prone to less confusion during times of crisis. Further the efficiency also translates to another important characteristic in the business- attention to detail. Thus documentation should go a long way in convincing you that a particular business is a sound buy.
4. Will You Be Able To Run It?
When you are studying the financial statements to decide whether you want to buy a business, check whether the company is likely to have a regular flow of income even in the absence of the previous owner. Sometimes a company depends very heavily on the performance of one person. If the company you're considering is one such, then you should find out whether there is a team in place to take over the previous owner. If you have sufficient expertise to buy a business and take over the company from the previous owner, then you will have to consider what your relationship with the company's employees will be. Will you bring in your own team? Will you retain the old workforce? Depending on that you will have to decide whether to draw up long term employment contracts with the company's employees.
When you decide to buy a business, keep in mind that there will always be unexpected variables, and plan cautiously.